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Challenges To SEC Use Of Administrative Proceedings Likely To Increase

By Jeffrey T. Petersen, Esq. of Shustak Reynolds & Partners, P.C. posted on Friday, March 13, 2015.

Our blog post on February 12, 2015 detailed the SEC’s recent increase in use of administrative proceedings to seek civil monetary penalties against all individuals, even those who are not registered or associated with a registered entity. That post also highlighted the problems an individual can face in such proceedings, i.e., the speed at which one goes to hearing, and the limited discovery rights provided.

Under these circumstances, it is no surprise that challenges to the legality of these administrative proceedings have been coming at a furious pace from respondents and potential respondents to such proceedings.

For example, Laurie Bebo, the former CEO of Assisted Living Concepts, Inc., filed for a preliminary injunction in federal court to halt an SEC administrative proceeding against her on the grounds that the proceeding violated her equal protection and due process rights. In addition, at least three putative respondents to SEC action have filed preemptive lawsuits to prevent administrative proceedings from being initiated by the SEC.

Just last week, however, the court in the Bebo matter ruled that it had no jurisdiction to prevent the administrative proceeding from taking place, even though it found Bebo’s claims “compelling and meritorious”. The court reasoned that because the securities laws provide for judicial review of any SEC administrative decision, Bebo would have to go through that process in order to obtain relief rather than seeking preliminary relief with the district court.

The Bebo opinion also highlights the challenges these proceedings can impose on the individual litigant. The proceeding was instituted on December 3, 2014, and has already been scheduled for hearing on April 20, 2015, with witness lists and expert reports ordered exchanged by March 13, 2015.

With the increased use of administrative proceedings by the SEC, and the unique complications they bring, one can be certain there will be many more challenges to the legality of these proceedings in the future.

Jeffrey T. Petersen, Esq. Shustak Reynolds & Partners, P.C.  Shustak Reynolds & Partners, with offices in California and New York, focuses on financial services law and represents broker dealers, investment advisors, registered representatives and high net worth investors.  Jeff can be reached at 619.696.9500.

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